Irish, EU, IMF face marathon talks for loan deal

By Shawn Pogatchnik

Associated Press

Published: Friday, Nov. 19 2010 10:20 a.m. MST

DUBLIN — As EU experts dug through the books of Ireland's debt-crippled banks, the question moved from whether Ireland will take an international bailout to under what conditions.

On the firing line was Ireland's prized low business tax, which the government says has lured 1,000 multinationals to Ireland over the past decade — but which it may have to give up to satisfy conditions of being rescued.

The Irish rescue is the latest act in Europe's yearlong drama to prevent mounting debts and deficits from overwhelming the weakest members of the 16-nation eurozone. Greece was saved from bankruptcy in May, and analysts say Portugal could be next in line after Ireland for an EU-IMF lifeboat.

Officials on all sides cautioned that the Dublin talks could stretch into early December, after Ireland gives more clarity on its plans by publishing a four-year outline for slashing €15 billion ($20.5 billion) from its deficit — forecast this year to reach a stupendous 32 percent of economic output.

The Irish government said the plan, to include €4.5 billion in cuts and €1.5 billion in new taxes for 2011 alone, will be published by Tuesday — but won't include any change to its 12.5 percent rate of corporate tax, among the lowest in Europe.

Officials in Germany, France, Britain and Austria argue Ireland should be prepared to raise that rate to help pay off its debts. They say it's not fair for Ireland to receive aid from EU partners while simultaneously sticking to a tax policy that amounts to unfair competition.

Ireland says the low tax policy is an essential anchor for keeping employers who generate a fifth of Ireland's gross domestic product and provide the healthiest stream of tax revenue. Finance Minister Brian Lenihan, speaking ahead of Friday's talks, said the defense of the 12.5 percent rate was "a red line" that Ireland would not allow the IMF to cross.

For Lenihan and Prime Minister Brian Cowen, the low corporate tax is one of the few points of unity with Ireland's opposition Fine Gael party. Giving it up might be the death sentence for Cowen's government, whose approval ratings are languishing at 11 percent.

But Ireland's hand has been forced by a recent run on deposits at Irish banks, which are already receiving a minimum €45 billion bailout. Allied Irish Banks said Friday it has lost a €13 billion ($18 billion), or 17 percent, of its total deposit base since June. It also announced plans to sell €6.6 billion ($9.05 billion) in new shares next month — likely taking the government's stake in the bank from 18 percent to more than 90 percent.

The European Central Bank has been stemming deposit losses with short-term loans that have ballooned to a reported €130 billion, a quarter of the ECB's eurozone loan book. But the ECB's unlimited supply of liquidity to banks is likely to end as the central banks continues to phase out its financial crisis support measures, adding pressure on the Irish government.

Ireland's representative on the Frankfurt-based bank, Irish Central Bank governor Patrick Honohan, said Thursday he expects Ireland to receive a credit line worth tens of billions of euro that would serve as a backstop for Irish banks struggling to access funds elsewhere.

Critics of Ireland's low tax on business profits say raising it would be the quickest way to increase state income without hurting consumers. According to Eurostat, corporate tax rates in the eurozone average 25.7 percent, and only Cyprus and Bulgaria are lower than Ireland with rates of 10 percent.

Germany and France, whose rates stand at 29.8 percent and 34.4 percent respectively, have spent the past decade grumbling as some of their own companies and a disproportionate share of U.S. multinationals choose Ireland as their EU headquarters.

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